The yield on 10-year U.S. Treasury bonds has jumped above 5%, fueled by the AI boom. Since September 15th, the higher interest rates have fueled fears about government fiscal crisis, pushing interest rates even higher. Slowing AI spending would give the FED space to lower interest rates, allow other parts of the economy to expand, and give the government more fiscal space.

The U.S. is likely to respond to a fiscal crisis with higher inflation. The possible paths are:
=> continued AI boom. higher interest rates. fiscal crisis. inflation.
=> slowed AI spending. lower interest rates.

Bonds might work as a hedge for AI boom investments. If the AI boom ends, lower interest rates would boost bond returns.

There is increased bond demand because of continued government deficits and the AI investment boom. This M* article looks at the correlation between changes in yields and government debt-to-GDP. There was no correlation before September 15th, but the correlation has jumped in the last month, with the article finding "the R-squared in regressing yield movements from Sept. 15 to Oct. 8 on debt is 0.50. What’s happened since Sept. 15? ... Ultimately, however, if fears around a fiscal crisis are rising, it might not matter what triggered them. That’s because such fears can become a self-fulfilling prophecy."

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The Bond Selloff Story Has Shifted. Here’s How That Changes the Stakes for Investors
Government debt worries are rising, but it’s still not time to panic. Here’s what to keep in mind if you’re worried about a debt crisis.
Preston Caldwell Oct 14, 2026
"Below, we plot the change in 10-year government bond yields this year versus a country’s government debt/gross domestic product as of 2025. This shows that countries with higher debt burdens have also generally had a larger increase in bond yields (a worse bond selloff) this year...
In the US, it’s very unlikely the federal government ultimately opts for default in the event of a fiscal crisis. Rather, the Federal Reserve would step in before default to shore up Treasury markets. And, given the money creation that would entail, that means that the crisis is ultimately resolved by inflating away the debt."
morningstar.com - Bond selloff story has shifted heres how that changes stakes investors

Actually, AI Is Boosting Interest Rates, Not Inflation
The conventional wisdom misses the role of the Fed.
Preston Caldwell Sep 27, 2026
"If the Fed was offsetting the demand shock from AI by keeping interest rates higher than they would be otherwise, then we’d expect to see those high interest rates weigh on non-AI types of spending. And this is exactly what we see... If AI is playing a major role today in lifting interest rates, then any cooling of the AI boom should act to lower interest rates. Interest rates are still too high for much of the economy, but the AI boom has concealed this... In our latest US economic outlook, we expect interest rates to eventually fall, with the 10-year Treasury yield dropping to 3.5% by 2029, versus 5.0% currently. Slowing AI spending growth is a major reason for our forecast. If the boom inflates into a bubble, however, that could fuel higher interest rates in the near term."
morningstar.com - Is AI really fueling inflation its not that simple

Subject: Canary in Bond Coal mine?
"This is going ​to be a turning point in the pricing and availability and structure of credit that's supporting the AI boom," said Frumes, who believes that other AI-linked debt will follow CoreWeave into distressed territory. "It's going to get more expensive. There will be a lot more scrutiny and probably some pushback from investors."
OrmontUS writes on Canary in Bond Coal mine?